Tuesday, August 12, 2008

Random Thoughts

Okay lots of stuff going on to watch with many out there confused as to what to do. All the hedge fund boyz out there calling around trying to figure out what to do. You may be asking yourself what’s he mean calling around? Don’t the hedge fund guys study balance sheets and biz conditions or charts and other economic minutia, etc.Ha, ha, ha you are too funny! Seriously, If you believe that then I am sure you believe our problem is only sub prime, it’s thoroughly contained and nothing a couple of stimulus packages cannot fix.

Listen these hedge fund guys are worse than high school girls when it comes to gossip and info on trading. They gotta be in the popular trade, not because they are afraid of losing, but because they are afraid of missing out when everyone else is on board. It is A-okay to lose money but you have to be in the trade everyone else is. Have you been to a pee wee soccer game recently? (futbol for my European and South American readers) The children are like a swarm of bees around the ball. This is a perfect example of the modern hedge fund laureate. These guys call and text each other, asking each other what they own and what they’re buying. Now don’t get me wrong not all 100% of the hedge fund dignitaries are like this. Every so often you run into guys who are doing the homework, the legwork, and it shows. But these are the exception rather than the norm. Left to their own devices the vast majority of these fellas would have absolutely no clue what to buy, zero.

This swarm of bees concept is exactly what has been and is happening with our capital markets. Bill Fleckenstein has called the Fed serial bubble blowers. Whenever they face a crisis the reaction is the same, cut rates and flood the system with liquidity, which eventually fosters and new and worse bubble. The bees perpetually chase each bubble in their quest for immediate performance. Is this the process that is now playing out with crude oil and the energy comlex right now? The guru anchors on CNBC have been hinting and intimating that it is indeed a bubble. Unbiased of course.Or is it the high school girls/swarming bees phenomenon? With peak oil dead and the bees moving on to greener pastures.

Don’t count on it. Is Saudi or, Mexican production ramping up suddenly? Have the Saudi’s invited independent auditors to verify their reserves? Has theCanterall field in the Gulf of Mexico suddenly reversed its precipitous decline? E ven if congress lets us drill, drill, drill, the continental shelf, do we have the rigs, equipment and manpowerto do it? Working an oil platform is not like working the line for GM. Knowing this I have not been involved in the energy trade for some time and have counseled caution because even with stops you can have some severe damage as positions can gap at any time. With no position on I can tell you that nothing has changed. Actually something has changed. Matt Simmons warned that any substantial pullback in crude would give the peak oil naysayers all the ammunition they need to sing how this was a bubble and that we have plenty of crude oil and that this really isn’t a problem at all. And didn’t Donald Trump recently opine that there are tankers of crude all over the world with plenty of crude oil.

Retailers running on this news as the cheerleaders on CNBC rejoice as the move is across the board. No arguing with the tape but does this change the trend. It is a bear market which the bulls and loathe to admit . So now the short bus ridiing equity crowd is counting on a 30cent drop in gasoline prices to translate into great numbers for the retailers. The tape is never wrong, it just can get confused, like they did when they thought the credit crisis was contained. And then when they thought it was only subprime. You get the picture. I would hazard a guess that the trapped retail money is using this rally as a heaven sent gift to exit positions. Do you believe even a dollar/gallon drop at the pump can save the beleaguered home debtor with his mortgage, his credit card, his Heloc, and his employment scenario. Take a good long look around you and decide for yourself. I will change if the facts change and until now they have not, not withstanding any amount of cheerleading from the administration or the financial media.

I was at a dinner the other evening and had to oportunity to meet and chat with a cat who ran a $75 billion fixed income dept for a national outfit. We got to discussing CDO’s, CLO’s and the like. He told me how the jockeys from MER, LEH, BSC would call and come visit peddling that toxic sludge and each time his question was the same, “who is buying all this crap?” Lucky for him he stuck to his guns and avoided the mess. By the way, his thoughts on who has fessed up and who has not were quite interesting as he, like I, have been intrigued at the lack of Asian financial names on the write down “perp list”. Just something to think about if you’re inclined the next tim Jim Cramer comes on telling you the bottom is in with caveat after caveat.

I was laughing as the news has come out that the Keystone Cops, errrr excuse me, the SEC, is now investigating deep out of the money put buying on Bear Stearns by certain interests. I would counsel the SEC to begin by looking at people at the FED, Treasury and Bear Stearns. And iIf you think insiders at Bear , along with the Fed and Treasury, wouldn’t share information with friends on the outside for a piece of the action, well then, I am sure you believe FDIC deposit insurance is rock solid, Fannie and Freddie are solvent, and the National Enquirer is lying and John Edwards is gospel.

Listen, the IndyMac collapse was your shot across the bow. Many will ignore it at their own peril. Things don’t happen overnight, they are a process and take time to develop. How long has it been since IndyMac bit it, what, 4 weeks. The question is, what have you done to protect yourself. I don’t know if you caught a snippet of the segment on pompom TV last week, where Meredith Whitney of Oppenheimer was a guest host. She mentioned that very, very high net worth clients were asking here about the safety of their money regarding FDIC deposit insurance. She felt this was a sign of the times. Now what do you think you should be asking or better yet doing?

You think Jim Cramer, Larry Kudlow, Dennis Kneale and the rest of the cheerleaders on CNBC are going to navigate you thru this? Remember that segment I just referred to with Meredith Whitney…. Becky Quck asked her the memorable question as to what was the secret of her success given she saw this debacle coming while most on Wall St. did not. I wish Ms. Whitney could have answered candidily, and that answer would have been,…. Well you know Becky, quite franklky the secret was I didn’t have my head up my ass, which was a major factor!

I saw some credit unions over in Connecticut well belly up over the weekend. Lots of coverage on CNBC right? Like I said IndyMac was your warning, you have absolutely no excuses to get caught with more than the FDIC limit at any one instituation. And further to that with short term treasuries available directly to the public, limits are not a problem.

My problem with the financials is this, they originated and packaged toxic paper, and peddled it to you via your pension fund plain and simple. They knew the auction rate securities (ARS) market was toast and still were peddling it to you as a good as cash equivalent. They made the cardinal sin Tony Montana was warned about in the classic Scarface, in that they got high on their own supply. In Enronesque fashion they owned the toxic paper they peddled out via off balance sheet entities. They figured they were smart enough that they could get a seat on a lifeboat before Titanic sunk. They financed leveraged buyout deals like Chrysler, United Rentals, etc, etc. and now much of that paper sits on their books as they are unable to find any suckers. They repacked the mortages and sold them to Fannie and Freddie knowing the appraisals were bogus and the mortgage applications were so fraud laden as to be laughable. Yet I keep hearing how these stocks are buys! Balance sheet erosion, cash flow erosion, reputational erosion , litigation nightmare, and an investment banking deal market disappeared. Someone please explain to me what I am missing as to not be frothing at the mouth to buy a Merrill Lynch, Lehman, Goldman or Morgan? Please enlighten me, and don’t tell me they are discounting all the news cause Pauson and Bernanke tried that on me before when they told me it was subprime and it was contained.

I get lots of email regarding some of my chart interpretations. Mostly are quite nice and decent but I also get notes of the other type. The type that take it personally that you are negative on a position they are bullish of or vice versa. I have made plenty of mistakes and will continue to make plenty more but one thing I will not do is employ the buy, hope and pray method and then when that doesn’t work, implement the average down, hope and pray some more method. Please refer to Nick Leeson for evidence in this regard.

I also get a few notes complaining my technical analysis is not technical analysis at all. I have heard this before, these are people who need multiple moving average combined with Bollinger bands. This put alongside some stochastics mixed in with some on balance volume and they feel much more confident in their decision making. I applaud them and would counsel them to stick with it thru thick and thin and be consistent. I employ what I know I can be consistent with, and that which I can understand. Besides, I am not very bright and need to keep it dummed down so I can understand it.

One last note, please remember that we are in a bear market and in a bear market you can only have 1 of 3 positions. Beaish, very bearish or neutral. I keep hearing many traders, the guys and gals on Fast Money included, encouraging the masses to jump in and trade the rallies. I take issue with this because this strategy is for a bull market, when the current or prevailing wind is at your back and of course you should buy the dips. Unfortunately we are in a bear market so it would be logical to sell the rallies. I am not splitting the atom here but I am at a loss to explain this advice other than they (traders) believe the masses uninclined, unable, and disloyal to the nation to short.

Good speculating to you all and never ever forget that"an investor is a speculator who made a mistake and will not admit it".

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